FOREX-Dollar perched at 1-wk high vs yen before Fed vote; euro struggles

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* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, March 20 (Reuters) - The dollar held comfortably at a one-week high against the Japanese yen on Tuesday as investors positioned for the outcome of a U.S. Federal Reserve policy decision on Wednesday where it is widely expected to raise interest rates.

With a quarter point hike — its sixth since the Fed began raising interest rates in late 2015 — baked into market prices, major currencies were mired in broad ranges.

“Euro/dollar is being buffeted by cross currents, especially as both central banks (Fed and the ECB) are normalizing policy but it needs an unexpected policy action to jolt markets out of current ranges,” said Neil Jones, Mizuho’s head of currency hedge fund sales in London.

Markets expect two more rate hikes after Wednesday for the remainder of the year, although analysts warn that if a majority of Fed policymakers forecast a total of four increases this year in their projections then the dollar could gain.

“Only a confident sounding outlook wouldn’t shake the dollar out of its ranges as there seems to be more structural headwinds at play, but if we see many voices leaning towards four rate hikes, that might be a game changer in the short term,” said Richard Falkenhall, senior FX strategist at SEB.

Along with some expectations of a more confident sounding Fed, a sharp drop in a confidence survey among German investors also weighed on the single currency.

The ZEW research institute said its monthly survey showed economic sentiment among investors dropped to 5.1, its lowest reading in a year and a half, from 17.8 in the previous month. The consensus forecast in a Reuters poll was for 13.0.

The single currency was down 0.3 percent below the $1.23 line and hovering just above a three-week low of around $1.2260.

The dollar edged 0.43 percent higher against a basket of currencies to 90.15, nearly reversing a 0.5 percent drop the previous day thanks to a relief rally in sterling after a transition deal was announced and the euro’s bounce.

The common currency had drawn strength on Monday from a source-based Reuters report that ECB policymakers are shifting the focus of their debates.

Policymakers are comfortable with market forecasts, including for a rate hike by the middle of 2019, and the debate is increasingly about the steepness of the rate path thereafter, as some want future expectations contained, given the slow rebound in inflation, five sources with direct knowledge of the discussion told Reuters.

On technical charts, the dollar seems to have found strong support in the 105.00 to 105.50 yen area, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

He added that the dollar’s yield advantage over the yen could also help bolster the greenback.

“Once Japan’s new financial year starts (in April), Japanese institutional investors are likely to become active in foreign bond investments,” Murata said, referring to the possibility they will take on foreign-exchange risk in search of better returns abroad.

Still, some traders saw limited upside potential for the dollar, with the yen seen supported by signs of a retreat in investor risk appetite.

“It’s pretty easy to stay short dollar/yen in this environment given the risk aversion,” said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore.

The yen is a traditional safe-haven currency that tends to attract demand in times of market turmoil.

The dollar was trading 0.4 percent higher against the yen at 106.52 yen. (Reporting by Saikat Chatterjee; Additional reporting by Masayuki Kitano in TOKYO Editing by Keith Weir)

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